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Income Approaches of Business Valuation

Income approaches of business valuation are one of those methods through which the economic value of a business is determined. This approach is also termed as discounted cash flow approach. The basic factor on which the approach concentrates is the earnings generated by the business.
Estimates of the present market value of a business depend on the expectation of a purchaser regarding the yields from the particular business. Business valuation is done for a number of reasons. Primarily, through business valuation market value of any business in the existing market is determined.

At the same time, there are several other disputes that can be there like estate and taxation disputes, legal complexities, allocating funds for assets and many more. To solve all these, business valuation is very necessary because an estimate of the marketable assets and value of these assets are decided by the process and income approaches of business valuation are one of the ideal methods of doing this. A number of methods are used by the income approach of business valuation for the purpose.
These are the capitalization rates, build-up method, capital asset pricing model, weighted average cost of capital and so on.
The time value of money is used to bring out the business valuation. The future cash flows are provided at a present value through a definite process. Income approach of business valuation is widely used by the investment sector, corporate financial management sector and many more.

Different Methods Used by Income Approaches of Business Valuation

Capitalization Rates: The capitalization rates are used to bring out the existing value of a return that is expected from a particular business.

Build-Up Method: It is one of the popular methods that are used by the income approaches of business valuation. This method is used mainly for the estimation of the discount rate that is related to the net cash flow (after tax).

Weighted Average Cost of Capital: This is also an important approach for deciding the discount rate. Actual cost of capital is calculated through this process.

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Last Updated on : 27th June 2013

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